IRS Issues Interim Report about 401(k) Compliance Questionnaire

The questionnaire findings also show
the impact of the 2008 market downturn on plan sponsor offerings. The
percentage of 401(k) plan sponsors that suspended or discontinued matching
contributions in their plans increased from 1% in 2006 to 4% in 2008. The
percentage of 401(k) plan sponsors that suspended or discontinued the
non-elective contribution in their plans increased from 2% in 2006 to 5% in
2008. The percentage of 401(k) plan sponsors that reduced non-elective
contributions in their plans increased from 1% in 2006 to 5% in
2008.

From 2006 to 2008, 58% of 401(k)
plans experienced a per-participant increase in the dollar amount of elective
deferrals; 52% of plans experienced a per participant decrease in the
percentage of compensation deferred. From 2006 to 2008, 67% of 401(k) plans
that permit employees to make after-tax contributions experienced a
per-participant increase in the amount of such after-tax
contributions.

Twelve hundred 401(k) plan sponsors
were randomly selected to complete the 401(k) Questionnaire via a secure
website. Ninety-eight percent of plans receiving the questionnaire responded.
Follow-up actions were taken in the case of all non-responders.

Eighty-six percent of 401(k) plans
are some form of pre-approved plan. Twenty-three percent of plan sponsors have
requested a determination letter from the IRS.

As for
plan administration, 53% of section 401(k) plan sponsors use a third-party
administrator for plan administration. Third-party administrators are
responsible for timely plan amendments for 73% of 401(k) plans, and are
responsible for the annual preparation of the Form 5500 for 83% of 401(k)
plans.

Plan Designs

Findings from the IRS’ 401(k)
Compliance Check Questionnaire show 54% of 401(k) plans provide a
one-year-of-service requirement before allowing participation in the plan; 64%
contain an age-21 eligibility requirement; and 13% have no eligibility
requirements.

Sixty-eight percent of plan sponsors
provide matching contributions, and 65% provide some form of employer
non-elective contribution such as a profit-sharing contribution. Fifty-eight
percent of 401(k) plans contain a one-year-of-service requirement in order for
participants to be eligible for matching contributions.

The most common form of benefit in
401(k) plans is a lump sum. Sixty-two percent allow in-service withdrawals, 76%
permit hardship distributions, and 79% permit direct rollover
distributions.

One
percent of 401(k) plans allow investment in employer securities, and 1% have
investments in assets held overseas.

What’s Next?

The IRS said it will use information gathered from the 401(k) Questionnaire,
in conjunction with other data, to enhance its external section 401(k) plan
administration compliance tools; produce more useful outreach materials;
improve voluntary compliance programs; assess the need for further formal
guidance; and define some upcoming projects and enforcement
activities.

The agency encouraged 401(k) plan sponsors to use the 401(k) Questionnaire,
in conjunction with the report findings, to strengthen their internal controls
over plan operation and to find, fix and avoid errors in their section 401(k)
plans.

“The findings in the report could help you make decisions about your plan,
including features to consider and pitfalls to avoid,” said Monika Templeman,
director of EP Examinations.

A final report will include comparisons by the plan size stratifications.
These breakdowns will identify differences between small and large plans. The
report will also include information on items from the 401(k) Questionnaire not
analyzed in the interim report. It is targeted for release in 2012.